Posted by: stillironic | July 1, 2012

Finance Theory: Trying to Outfox the Guppy

If you’re in the mood for a few laughs, I recommend looking into financial history.

Actually, investigating the origin of the word “finance” itself is worthy of a smirk or two. You have “fin,” a body part that keeps sharks on target for the kill. And “nance,” a slow-growing shrub, whose branches can be, quote, cut into small pieces and thrown in streams to stupefy fish, unquote. This is most informative; outfoxing fish is a predicament we all face from time to time. I would be reluctant, however, to apply this technique when laboring to outfox one of your larger sharks.

The history of finance is full of many similar illuminating facts. Such as: “Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process.”

And: “Mounting evidence suggests that investors sometimes act irrationally.”

Which begs the question: How high will the evidence have to climb to push the afore-mentioned “theorists” into believing investors sometimes act irrationally? As high as the Empire State Building? As high as Mt. Everest?

What were economic and finance theorists thinking?

Are theories of aging based on the human body staying young forever?

Are theories of drug addiction based on people having no tolerance for addictive substances?

Are theories of intelligence based on all humans possessing a high IQ?

Imagine medical theory based on the human body never aging, getting sick, or being injured. That would pretty much limit MD specialties to plastic surgery and obstetrics. Few people would aspire to practicing medicine. Doctors might even be considered leeches on society. Like lawyers.

When people got sick or injured, they’d summon the local barber. When he wasn’t attending conferences at posh golf resorts. The mentally challenged of rational mind would seek out a philosopher; the irrationally inclined would visit a psychic. Wars would be fought over rational and irrational beliefs. World population would be at medieval levels; even the most skilled barber is no match for plagues and pestilence.

Even more disturbing, House would have to diss his team and their differential diagnoses between cutting hair and hawking Brylcreem.

Wake up economics and finance theorists. With your stupefying premise of rational and fully informed decision-making, you’d have trouble outfoxing a guppy in a fishbowl.

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